A series about people, products and discoveries that changed the world There was a time when mutual funds roamed the financial landscape virtually unchallenged, charging high fees and underperforming benchmarks – as a group – without concern. Investors with smaller amounts of capital may have grumbled, but they had few alternatives. In 1990, a competitor emerged at last: The Toronto Stock Exchange unveiled the world’s first successful exchange-traded fund, the Toronto 35 Index Participation Fund, known as TIPs, initiating a profound change in the way the world invests. “The idea behind the product was to democratize equity investing for retail investors,” said Peter Haynes, managing director of index products at Toronto-Dominion Bank. He added: “The irony is, there was a $150-million product launch for TIPs on day one, and almost every dollar went to institutions.” Mr. Haynes was then a 21-year-old member of the TSX team that created TIPs – now known as the iShares S&P/TSX 60 index ETF, and owned by BlackRock Inc. – years ahead of similar index-tracking products in the United States. The appeal was clear: The units traded throughout the day, they provided instant diversification to Canadian blue-chip stocks, and management fees were zero. Institutional investors loved the ETF because they could use it to move money in and out of the market easily. But small investors eventually discovered that the ETF gave them the chance to invest like big-shot pension funds, with access to a basket of stocks for little more than a one-time commission on a stock trade. “The goal was definitely to provide transparent, low-cost, flexible exposure to the Canadian equities market,” said Warren Collier, head of iShares at BlackRock Canada. “And that’s the underlying value proposition of ETFs globally, which continues to drive their growth.” The success of that first ETF in Canada helped spawn a global industry that now numbers thousands of funds worldwide, giving investors access to emerging market stocks, gold, corporate bonds and just about every other asset class you can think of. Global assets total $4.75-trillion, and are closing in on mutual funds. The benefits have extended beyond ETFs. Now faced with an onslaught of low-cost competition and the popularity of passive investing, mutual funds have slashed their fees. The growth of the ETF industry has also led to the creation of online money-management firms. These so-called robo-advisers require access to low-cost ETFs, which allow them to offer cut-rate fees that undercut more expensive, traditional wealth-management services. “I think we are still in early days, in terms of the growth of ETFs,” said Dani Lipkin, head of exchange traded funds at the TMX Group. But why did these profound changes start in Canada? The United States took a shot at creating an ETF in 1989, a year earlier than Canada. However, the Index Participation Shares, a proxy for the S&P 500, were quickly withdrawn following a successful lawsuit from the Chicago Mercantile Exchange. It took until 1993 – three years after the successful TSX launch – for State Street Global Advisors to follow with what is now called the SPDR S&P 500 ETF Trust, the world’s largest ETF. Mr. Haynes credits Canada’s triumph to a more hospitable climate toward financial innovation here: “I would have to thank our regulators,” he said. “They did not get filibustered, so to speak, in terms of figuring out where this product would fit into the landscape.” Mr. Collier noted that Canada’s equity capital markets were smaller than U.S. markets, but still well-developed. This may have made the country more nimble. As well, he believes that the TSX benefited from a wealth of smart, talented and creative people. But the environment was also right: “Canada is a place where you can take chances,” he said. Follow David Berman on Twitter: @dberman_ROB

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